(Published by Bob Ciura on June 15)
There are many market sectors in which European stocks have higher dividend yields than their U.S. counterparts. One of them is health care.
The strongest U.S. health care stocks, like Johnson & Johnson (JNJ, Financial) or Abbott Labs (ABT, Financial), typically have 2% to 3% dividend yields and long histories of rising dividends. In fact, both of these companies have paid increasing dividends for more than 25 years in a row – making them Dividend Aristocrats.
You can see the complete list of all 51 Dividend Aristocrats here.
Many established European health care stocks, like AstraZeneca PLC (AZN, Financial), offer higher dividend payouts but do not have the same track record of increasing dividends every year in U.S. dollar terms.
AstraZeneca currently has a dividend yield of around 4% using trailing 12-month dividends. In addition to a hefty dividend yield, the company has growth potential thanks to a strong pipeline.
Investors can increase their portfolio income by considering international dividend stocks such as AstraZeneca.
Business overview
AstraZeneca is a global pharmaceutical giant. The stock has a market capitalization of $87 billion.
The company’s core therapeutic areas are:
- Cardiovascular and Metabolic Diseases
- Oncology
- Respiratory
- Inflammation
- Autoimmunity
- Infection
- Neuroscience
The current business environment for AstraZeneca is challenging due to patent expirations. Pharmaceutical companies facing a patent cliff are in a difficult position.
Patent losses drag down revenue as branded products typically lose market share to generic competition. In addition, it is costly to develop new drugs.
For example, in 2016, AstraZeneca’s total revenue declined 7% to $23 billion due to a 10% decline in product sales. Adjusted earnings per share declined 5% to $4.31.
The biggest reason for the company’s poor performance last year was falling sales of Crestor, which has lost patent protection in the U.S. and is seeing intensifying competition from generics.
The impact worsened in the first quarter. Total sales fell 10% for the quarter and adjusted EPS declined 4% year over year.
Patent expirations are expected to be a drag on the company for the remainder of 2017.
AstraZeneca expects total revenue to decline in the mid-single-digits this year. Adjusted EPS are likely to fall in the low- to mid-teens on a percentage basis.
The good news is AstraZeneca is finally past the worst of its patent cliff.
Source: First-Quarter Presentation, page 7
Crestor represents the last of the company’s major products—meaning those that generate $1 billion or more in annual revenue—facing patent expiration.
As the impact of patent expirations for Crestor and Nexium lessen over time, sales of new products will lift the company’s overall results.
As a result, 2017 could mark a turning point for AstraZeneca, setting the stage for growth in 2018 and beyond.
Growth prospects
Operating in Big Pharma, AstraZeneca’s major growth catalyst moving forward is its drug pipeline. A strong product portfolio is crucial to overcoming the threat of patent expirations and generic competition.
Fortunately, AstraZeneca’s pipeline is robust. It has 133 products in its pipeline, 12 of which are in late-stage development.
Source: 2016 Earnings Presentation, page 9
The focus of AstraZeneca’s pipeline investments are in the oncology, cardiovascular and metabolic diseases, and respiratory areas.
AstraZeneca refers to its collection of products that will fuel the company’s future as its Growth Platforms. In all, these products represent approximately two-thirds of the company’s total revenue.
Sales of Growth Platforms products increased 5% last quarter. An example of a promising development is Tagrisso, which recently launched in Japan and received regulatory approval in China.
Tagrisso helped AstraZeneca generate $236 million in new oncology sales last quarter.
AstraZeneca is making a major push into new geographic regions. Specifically, the emerging markets are a growth catalyst moving forward.
Source: First-Quarter Presentation, page 11
The company expects sales in the emerging markets to rise at a mid- to high-single-digit range over the long term.
Organic sales in the emerging markets rose 5% last quarter. Emerging markets like China and India represent AstraZeneca’s largest geographic segment.
One example of AstraZeneca’s success in underdeveloped nations is with Brilinta. Product sales rose 54% in the emerging markets last quarter, led by 68% growth in China.
Dividend analysis
Most investors are accustomed to quarterly dividends, which are more typical for U.S.-based companies.
AstraZeneca pays a semi-annual dividend, which is more commonly found among European companies. AstraZeneca makes two dividend installments each year, with a larger second semi-annual payment.
AstraZeneca’s dividend schedule is as follows:
- First interim: Announced with second-quarter earnings, paid in September.
- Second interim: Announced with fourth-quarter earnings, paid in March.
For U.S.-based investors, understanding how much AstraZeneca will pay in dividends requires a bit of arithmetic.
First, U.S. investors own American Depositary Shares. Each ordinary share of the company is equal to two ADSs.
Plus, AstraZeneca pays its dividends in British pounds. This exposes investors to currency risk as the exact amount of dividends paid in U.S. dollars will fluctuate based on prevailing exchange rates.
AstraZeneca’s past two dividend payments totaled 2.19 pounds. Based on current exchange rates, this amounts to $2.80 per share.
Next, since one ordinary share equals to two ADSs, dividends over the past year equal approximately $1.40 per share.
Based on the June 14 closing price of $34.19 per share, this amounts to a yield of 4%. The next upcoming dividend, however, will likely be considerably larger than the previous year’s September dividend payment.
Last September’s dividend was hiked nearly 20% from the previous September payout, so there is a chance AstraZeneca could effectively yield 5% once the upcoming dividend payment is announced.
Additionally, the incredibly strong U.S. dollar has suppressed dividends paid in U.S. dollars. If the dollar reverses course in the future, it would be a tailwind for income investors.
In addition to its high dividend yield, AstraZeneca stock could be a good value. Shares trade for a price-earnings ratio of 8 based on 2016 adjusted EPS.
Considering the S&P 500 Index trades for an average price-earnings ratio of 26, AstraZeneca stock could be undervalued.
While earnings are set to decline again in 2017, the company is likely to return to growth next year. This could warrant a higher valuation multiple.
Final thoughts
Like most of Big Pharma, AstraZeneca has struggled from patent expirations. This has weighed on the company for several years.
Fortunately, the company’s patent expiration phase is coming to an end. In addition, AstraZeneca’s strong pipeline and heavy presence in emerging markets lay the groundwork for future growth.
As a result, AstraZeneca is an attractive stock for dividends and international diversification.
Disclosure: I am long ABT.
